90 seconds at 9 am

90 seconds at 9 am: Barclays CEO pushed onto his sword over widening LIBOR scandal; Diamond accuses Bank of England in scandal; Milk powder prices down 5.9% in Fonterra auction; NZ$ solid over 80 USc

4th Jul 12, 9:00am by Bernard Hickey

Here's my summary of the key news overnight in 90 seconds at 9 am, including news Barclays CEO Bob Diamond was forced to resign overnight after late night calls from the heads of the Bank of England and the Financial Services Authority to his chairman Marcus Agius that his position was untenable.

The widening LIBOR (London Interbank Offer Rate) scandal in London claimed the scalps of Diamond and his Chief Operating Officer Jerry Del Missier, along with Agius himself earlier in the week. See more here at Bloomberg.

The Bank of England itself is under fire now with Diamond threatening to expose its role. Diamond has suggested he got a nudge and a wink in 2008 from the Bank of England to lie about the interest rates Barclays was declaring in the LIBOR setting process to make Barclays appear stronger. See more here at Reuters and the FT.

Diamond oversaw the fast growing investment banking part of Barclays from 2005 to 2009 when Barclays was falsifying its LIBOR rates. The scandal threatens to spread to the worlds biggest banks with 18 other banks being investigated by authorities over claims they lied about the rates submitted in the LIBOR setting process. LIBOR is the base rate for over US$350 trillion (with a t) worth of interest rate contracts.

Meanwhile, US stocks closed up 0.6% in a July 4 holiday shortened session on growing expectations of central bank interventions in America, Europe and China to stimulate the flagging global economy. See more here at Reuters.

US investors are speculating the US Federal Reserve will unleash a third round of quantitative easing (QE III) or money printing to buy long term government bonds as early as August 1 after signs of contracting factory activity and stubbornly high unemployment in the world's largest economy.

Meanwhile, the European Central Bank is expected to cut its official rate from 1% to 0.75% on Thursday night at the same time as the Bank of England announcing a fresh round of its own QE.

Also, China's monetary authorities are expected to ease its Reserve Requirement Ratio for banks, which would free them up to lend more.

Meanwhile, the New Zealand dollar was solid near two month highs of over 80.4 USc and near record highs of 63.7 euro cents, despite news yesterday that New Zealand's commodity prices fell 2.4% in June to their lowest levels in two years. The last time our commodity prices were this low was in July 2010 when the New Zealand dollar was around 70 USc. That suggests the IMF's estimate of the New Zealand dollar being around 15% overvalued is about right.

BNZ's economists say their models show the New Zealand dollar is around 22% overvalued on a Purchasing Power Parity basis. See more here.

As if to emphasis how over-valued the New Zealand dollar is, Fonterra's fortnightly GlobalDairyTrade auction of milk powder overnight showed prices fell 5.9%. See the results here.

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30 Comments

by Vanderlei Luxemburgo | 4th Jul 12, 9:20am 1341350448

re the Fonterra price down, hasn't it been falling for most of this year, apart from 1 or 2 months where supply restrictions kept the price up? How much more of falling commodity prices can we take?

by Kunst | 4th Jul 12, 9:51am 1341352267

Cleaning up pollution in many sectors in most country a multi billion $ task – increasing fast.

There will be a time, when we all realise in New Zealand only a 100% pure NZeconomy will be successful long- term - branding quality, diversity and sustainability – not quantity.

by steven | 4th Jul 12, 10:13am 1341353623

Especially in a world of increasing energy costs.

regards

by David George | 4th Jul 12, 10:08am 1341353337

But, but didn't Roger J Kerr say, just the other day, that commodity prices were rising?

That they would contribute to an economic rebound of more than double the RBNZ's estimate and that the RBNZ have lost the plot.

Does he just make stuff up(s)?

by Colin Riden | 4th Jul 12, 11:59am 1341359981

Shhhhh! We are not supposed to look too closely at the auction's results. Like the average price being down 8.4%. Or that Fonterra's two main SMP products have failed to get above their opening price in both of the last two auctions.

Or ask why the price for the same two Fonterra SMP products leapt up 38% two auctions ago only to fall 15% and then another 15% to now be below where it was three auctions ago, and at its lowest gDT price ever.

by Vanderlei Luxemburgo | 4th Jul 12, 12:01pm 1341360114

Look Colin I think its time we started looking for alternative uses for WMP. What can we make from it? Bridges? Powerlines? Photovoltaics?

by Colin Riden | 4th Jul 12, 12:23pm 1341361434

You might think that maybe it was time to consider stopping borrowing an average of $25 per additional Kg of milk solids to produce even more of it.

Maybe I am looking at increasing WMP production back to front. Those potential increases are being used to justify creating more loss making irrigation projects also requiring borrowed money.

by Andrewj | 4th Jul 12, 1:01pm 1341363680

Hey Colin, must be a bright side, otherwise the BNZ wouldn't have lent 100 mill to some guy to buy 30 farms and create 15 large scale dairy farms with irrigation from a BNZ backed scheme. I suppose the boss at BNZ has it in his mind that if it goes to crap theres always the Chinese . Then all those conversions in South Canterbury backed by? I suspect the BNZ going for market share, those guy's in BNZ are friggin geniuses. We should ask Bernard to interview them. Then there are the new big irrigation schemes to increase our dependence on Dairy. It really is amazing how badly run we are.

by Henry_Tull | 6th Jul 12, 2:08am 1341497328

When NAB find out what BNZ are doing....

http://www.agrimoney.com/news/dairy-prices-dip-but-revival-could-be-on-…

At National Australia Bank, agribusiness economist Michael Creed said that "we see very little upside over the near term".

Elevated output, "which has seen around double-digit production growth in New Zealand, year-to-date growth of 4.3% in Australia as well as solid efforts from Argentina, the EU and the US, implies a global market that is extremely well supplied.

"Given that the surplus will take time to absorb, we are in for a period of subdued dairy prices," Mr Creed said.

http://www.sharechat.co.nz/article/c44d8f37/open-country-posts-fy-loss-…

Open Country Dairy, the milk processor controlled by the Talley family, tripled its full-year loss on the soaring price of raw milk and a strong kiwi dollar, and said it was forced to seek a waiver from its bank.

Open Country paid $8.5 million in interest costs in the year, up from $7.6 million a year earlier, having increased its bank debt to $130.5 million from $130 million.

The company was forced to seek a waiver from the Bank of New Zealand after it failed to meet its banking covenants relating to stock, debt cover and minimum equity. A new facility agreement was signed on Dec. 20 and the company has committed to funding facilities from the BNZ through to October this year, according to the report.

and

The Canterbury-based company made a net loss of $3.1 million in the 12 months ended July 31 last year, smaller than the loss of $11.7 million a year earlier, according to financial statements lodged with the Companies Office.

http://www.scoop.co.nz/stories/BU1206/S00749/synlait-milk-narrows-loss-i...

The milk processor was granted a waiver to a breach of its banking covenants by ANZ National Bank and Bank of New Zealand in June last year. As at July 31, its bank debt was $85.1 million. Interest and facility fees fell to $5.1 million from $9.1 million in 2010.

Bright Dairy partnered with Synlait Milk after the Canterbury company failed to attract investors keen on an initial public offering, in what was the Chinese firm's first international investment.

http://www.stuff.co.nz/business/farming/7149726/Big-increase-in-BNZs-ag…

In Canterbury, BNZ's agri-lending book had grown 52 per cent since January 2011.

One farmer client is proceeding with a $100 million dairy farm and irrigation conversion in Central Otago. The project involved the conversion of existing farmland to dairying, including installing 15 pivot irrigation systems, worth up to $2m each, plus the building of dairy sheds and other facilities.

http://www.stuff.co.nz/business/farming/7220203/Fonterra-milk-prices-sl…

''Following encouraging signs from the previous two auctions, we felt this one could have gone either way,'' said Mike Jones, a market strategist at Bank of New Zealand.

''It's still early days in the dairy season, but this bodes ill for payout calculations and may limit some of the recent New Zealand dollar enthusiasm.''

by Andrewj | 6th Jul 12, 9:48am 1341524897

Wow, Henry, so the BNZ are the greater fools. Never mind the Chinese will always be there.

So we get some dreamer to buy 30 family farms, shove them together spent millions (100+) on a centre pivot irrigation scheme, funded by BNZ (coinsidence). So where there were 30 farming families eaking out a living, we have one corporate with a tonne of debt, we are financialising farming and we all know how that worked for the world. If it goes to hell we just sell it to some Chinese corporate with a pretty dickie source of funding and dubious accounting practices with links to the government.

by Henry_Tull | 6th Jul 12, 7:05pm 1341558358

Or are they just doing good business for BNZ. They hold all the cards...

We know of instances where loan amounts outstand are at or greater than current productive valuations using $6kgMS.

Q: What happens next?: Lenders need not do much other than clean out cashflow by taking interest pmts and wait to sell the properties - could be 2, could be 4 years... They might even provide a loan to the then "new buyer"....

Its the Farmer Clients, soon to be former clients (your term dreamer seems to suit) that are essentially farming for the bank for pepper corn wages during this period.... From where we sit, it seems these guys

Really believed Fonterra payouts were ever upward from $7.00. That the commodity price cycle had been slayed.

Were more property developers wearing gumboots "charmed by the blue sky"

Really thought that large scale and above average district production would just "happen" after year three...

Caugh out by fast rising costs (irrigation) and other "service providers"....

In the meantime the massive gearing is locked in to farming systems, when many would prefer to see deleveraging....

Capitalism seemd to have worked on the way up, but it seems change of rules on the way down (if it were allowed). For the banks may say: Heads I win, Tails you loose....

One wonders at what stage or would ever the RBNZ have banks to mark to market these loans and clean them out of the system - we think the later.

by Henry_Tull | 6th Jul 12, 2:31am 1341498689

CR: a trip down memory lane...

http://www.nzfarmersweekly.co.nz/article/5760.html

Fonterra chairman Henry van der Heyden has said the value added component of shares would power up this year after five years of engineering.

Farmers were told at this year’s South Island Dairy Event in June the co-op’s added value goal was $1/kg MS within five years.

This would comprise 50c/kg MS from Fonterra Brands and 50c/kg MS from the co-op’s ingredients business.

Look at the date.....

Biting dairy costs build added value pressure

08-08-2006 | Richard Rennie

five years would be 2011/2012 ???

and:

Rural News 15 May 2012 issuu.com/ruralnewsgroup/docs/rn_515_may_15

13 May 2012 – The average equity in dairy is 59% which in a business sense "is ok but not particularly great". Save up to Customer Support Centre Fuel up on ...

Page 11: High Farn Debt Causes Concern

by Colin Riden | 6th Jul 12, 9:48am 1341524915

Thanks Henry.

An interesting reality check. Over the 6 years since 2006 dairy production is up about 20% but debt nearly doubles. And back then costs per Kg milk solids for efficient producers were around $2.00.

But Fonterra's recent "Strategy Refresh" looks rather like it is a "Strategy Recycled" from 2006. Except that back in 2006 the dividend was expected to reach $1.00 per Kg within a year.

Some performance metrics would suggest Fonterra reached its zenith in 2005.

by Andrewj | 4th Jul 12, 12:34pm 1341362061

I know where you can get a good deal, how many tonnes can I put you down for? Good for all of the above, and more, the only limit is your imagination, and in 3 years time with all the new irrigation schemes and new conversions in the South Is on tap we could even sharpen our pencil a bit more.

by powerdownkiwi | 4th Jul 12, 10:03am 1341352990

Diamond is a symptom, not a cause. The whole banking system is a ponzi, and it was only a matter of time before it hit the wall. Ponzi's always hit the wall exponentially bigger than they ever were, and exponentially-more unable to fund the shortfall.

by steven | 4th Jul 12, 12:43pm 1341362626

What other game is there?

Clegg and the rest, JK all are one trick ponies.....JK has what 50 million in the bank? 50million 1s and 0s.....

regards

by Vanderlei Luxemburgo | 4th Jul 12, 10:09am 1341353357

Re the LIBOR thing, how much power do the British pollies have there? Isn't the City of London Corporation or whatever its called basically an ancient independent entity who make their own rules?

by steven | 4th Jul 12, 10:16am 1341353761

BoE can step in.

and CofL, yes its sort of independent but only as long as its allowed to be...

regards

by Stephen Hulme | 4th Jul 12, 12:47pm 1341362877

yes its sort of independent but only as long as its allowed to be...

That's forever, as far as US banks are concerned, and if it's not they will have their man @ the BOE.

by Robpeter | 6th Jul 12, 9:58am 1341525536

Good comment about the loss making irrigation projects Colin.

There are currently field days being held with the Hurunui irrigation development project and a very thorough budget for likely uses when converting from just a dryland sheep to more productive part or fully irrigated enterprises is included.

http://www.hurunuiwater.co.nz/field-day-case-studies.php

The Ruataniwha irrigation investigation in Central Hawkesw Bay is also continuing apace with yet another glowing PR release from the CEO of HBRC (Andrew Newman) extolling the virtues of the "triple bottom line" despite refusing to release any details on the overall "metrics" of the scheme to the public until August.

Then it appears that the fast track to implementation will be aided by Government and HBRC project banking partner Banking partner, BNZ Advisory

"Director - BNZ Partners, Anthony Healy says Bank of New Zealand is delighted to be involved with a project of such national significance.

“We know that irrigation is key to enhancing New Zealand’s agricultural productivity and the bank is committed to supporting the sector as it develops,” says Mr Healy."

(There's that bank again...)

So if an Australian from the BNZ knows irrigation is needed to enhance productivity in New Zealand (before they have begun the financial analysis work); and the National Government is funding the start-up phase; and based on budgets such as the Hurunui one, irrigation MUST be a goer mustn't it Colin? ????

by Andrewj | 6th Jul 12, 10:02am 1341525732

or they are a pack of plonkers.

by Colin Riden | 6th Jul 12, 10:48am 1341528523

There appears to be no constraints on stupidity:

1. It almost appears local government CEOs are working to ensure that if NZ gets to point having to hang people off lamposts they are guaranteed places in the first tranche.

2. BNZ directors don't seem to be able to differentiate between agricultural production, productivity and profit.

3. I looked at the case studies from Hurunui yesterday. I suspect cherry picked examples, with not enough detail to determine if the modelling was robust, and leaving me with the impression it was PR spin. Even given that, if milk payout dropped below $6.00 per Kg MS you were left with a lot of debt and negative cash surpluses.

4. John Key is selling profitable hydro dams to "invest" some of the proceeds into loss making irrigation dams. Maybe he too wants to ensure his place in the first trance.

by Henry_Tull | 7th Jul 12, 1:23pm 1341624200

The Hurunui link is worth a look - for what the numbers don't show:

The Conversion example used is 475 ha.

Talking of a 300 ha dairy pad and run-off of 161 ha either irrigated.

With 3.5 hd/ha, 450 kg/MS = 1577 kgMS/ha at payout of $6.50. (Must assume Fonterra, and no /milk price/dividend split of the $6.50). Being 473,000 kgMS

Emplying 6.5 FTE (number of workers)

Water Scheme Costs: $3,502,500 and $47,000 per annum

Irrigation gear: $1,468,000 and $60,000 electricity per annum

Shed: Shed/Power/Yards: $1,595,000 (60 bale)

Fonterra Shares: $2,034,000 ($4.52/share).

Stock: $2,234,500 (cows $1,900/hd etc)

The list goes on and sums to $12,585,950

Farm Income is shown as $3,160,192

Farm Expenses marked as $1,643,100.

but tight, for example "owner" drawings exluded and later tallied to $54,000. :(

Any way regardless of how wishfull we think production numbers are, or generous the payout figure is (higher than this year and next)....

There appears an "accounting profit"$1,517,092 however Lets adjust that for Cost of Manager/Owner $150,000 (including on costs and production bonus etc) and include plant replacement (they say $60,000).

This gives us $1,307,092. income after farming expenses

Lets check our bank mortgage valuator:

divided by 1.5 (interest coverage ratio), $1,307,092 / 1.5 = $871,395

divided by 9% (bank plug rate) $871,395 / 9% = $9,682,193.

PROBLEM: Hurunui Water have us spending $12,585,950, but can only borrow 77% of capital cost.

We need find $2,903,757 to finish paying for the conversion.

PROBLEM: Hurunui Water have assumed that we owned the land, and the above mortgage calc would include any existing debt on the property....

So we need find $2,903,757 plus more money to repay any existing mortgage on the property. :(

Now. About that production: $1,577 kgMS / ha, for 1,051 cows in milk, done by a converting farmer with no diary background.... :(

Say, lets run production at 1,300 kg/MS.. This is 390,00 kg MS production....

PROBLEM: this drops income by $523,992

This gives us then $783,100. income after farming expenses. So, loan smaller (If we had jagged the first loan number, there would be interest for the loan, but little for the new equity we brought in, and nothing for the existing equity we have in or previously dry-land farm). You get the point....... but syndicators we are not.

We will let the readers at home do a similar exercise for:

1. Using current and forecast payout:

2. Make adjustments for expenses increase in power/water rates/council this/environment that ..... (gee run FWE at $4.00 to $4.25)

3. Paying the 6.5 FTE a living wage (we put that in for mist*.*).

As an aside, there should really be cash put aside for:

1. Bank loan repayment - or do we ever?

2. Sinking fund for replacement of irrigation (the gear has a short fixed life) - or do we sell before?

Sinking fund for replacement of shed (even 20 yrs would be 50k p.a) - see above.

Working capital (the business should be self funding) - doesn't happen.

New Capex - shed-data systems/environmental/herd gen/pasture - as if!!!.

And to repeat HW assumes we owned the farm to begin with....

They are using a "big" 475 ha farm

They assume a non-dairy guy goes straight across as a gun 1,577 kg/ha gun

For those at the front of the class, repeat the excersie as if you were putting a sharemilker on... (those were the days)....

(and HW say we are on light soils, even the rabbits bring a cut lunch up there)...

Note to self: Re postings above and Banks, The banks make no reference/note/expectation at any portion of oan will be/need be paid off.

by Colin Riden | 8th Jul 12, 12:26pm 1341707210

Henry - having asked someone who farmed at Medbury for their opinion on those budgets I am told that this is an existing farm that was converted to dairying with irrigation about 1997.

Presumably for some of the reasons you suggest the venture failed leading to a mortgagee sale. A warning there perhaps.

I struggle to see any national economic benefit coming from the Hurunui Water project via this farm. Unless of course you count as a benefit having to pay a second time for access to irrigation.

by Henry_Tull | 8th Jul 12, 1:22pm 1341710579

Yes, it was interesting to work through the numbers and yes Culverden has a good district average... but as a base case for development we didn't like them. We also do not like the probable capital financing required to pay the project expenses and felt that then would make the once developed farm high risk.

We would suggest, has we have seen with several recent conversions (2006/7 onwards), that if the above were to go ahead, the chance of develping farmer having to sell up would be high. Mortgagee Sale ¬¬¬ not sure/ definitely Zombie Farms with the banks running the place like an old ballot farm (not happy days)....

Possibly a second purchaser of the then developed farm would make a fist of it (as RobPeter mentions,A conversion in that area of that size is only likely to produce between 270-300,000kgMS/year in first 1-5 years and is unlikely to ever economically reach 460,000kgMS (as it would need generous lashings of bought in feed at a negative MC>MR).

But emotion aside, what is a large dairy farm (employing 6 to 7 people) worth, 5x's or 10x's or 15x's or 20x's recurring earnings.... Next question is - what are the recurring earnings?

In an earlier post we put up a Baileys farm for sale beside the synlait factory (but it was a synlait supplier) and asked the question....

Diesel and those would have us pay $35 + /KGMS (on the 473,000 kgMS) as a boiler plate number... We wouldn't :( (will pay for kgMS, but not the thought of it).

We think you have made a good point. The main benefit of this exercise seems to be,

1. A Water Scheme that cost too much to make (so all the "service providers" very happy), and then keeps on charging...

2. Lenders, that have "fresh" assets to lend against

3. Fonterra that picks up several million of "new/fresh" equity (with TAP it may never need repayment). Would they drive others to increase production as hook for new equity?

The farmer, well he Must change. HW show water + existing enterprise = $$$ losses

So he is heading for the pit. And the change (on current numbers) will take all he can borrow plus millions more. And locked into a relative high cost system...

One can see why the cannie few have been happy to see the "gum boot" developers come in and spend up large, and with the loot head for the hills, a bigger property and better view of the funny business they left behind below...

by Henry_Tull | 8th Jul 12, 1:28pm 1341710920

Its all there, here are the HW numbers....

http://www.hurunuiwater.co.nz/field-day-case-studies.php

and yes, fat fingers: re the 1,300 kg/ha, 390,000 kgMS all up...

by Robpeter | 6th Jul 12, 10:45am 1341528356

Oh please, Andrewj. $4.8 million has been spent on the CHB irrigation investigation already so they must at least be well paid plonkers surely??

by Colin Riden | 6th Jul 12, 3:38pm 1341545926

I would expect a positive correlation between pay and plonkerness. It is the way NZ governance currently works - for the time being.

by Alter Ego | 6th Jul 12, 7:58pm 1341561532

Coffee is down, bean there done that....

Milk is down, Water is well....water.

But costs are up....HERE.

How strange.

by Robpeter | 8th Jul 12, 9:24am 1341696253

SNAP!

Great work Henry Tull. As I said, a very thorough budget but I left it to others to point out some of the gaps.

A conversion in that area of that size is only likely to produce between 270-300,000kgMS/year in first 1-5 years and is unlikely to ever economically reach 460,000kgMS (as it would need generous lashings of bought in feed at a negative MC>MR).

Agreed. The figure for MS should be that without the added value component included, something which is going to vex more farmers as the full TAF really moves into top gear.

So Colin Riden is perhaps correct in this case (selling profitable dams to "invest" in unprofitable ones) and certainly correct with the CHB irrigation scheme where the cost per hectare will be higher ($10,000 to have the water at the gate, higher pivot costs due to terrain and farm shape) production likely to be lower (due to cooler summers, short growing seasons often, less sunshine hours/quality of feed).

The need for added water in much of this region is debatable (some of the zones lie in 1200-1400mm rainfall bands) and in the one year in ten when irrigation MAY be required (rather than some alternative management strategy) the Makaroro dam will hold sufficent water to adequately irrigate less than half the area being touted. Lucky then that the region does not get many real droughts. But if the water is not REQUIRED each season to farm, this then makes the cost of capital huge to each farmer as they bear the yearly costs that go with it.

So a scheme whose cost varies from $230-500 million depending on which Council source is being quoted really does seem like the taxpayer/ ratepayers in the HBRC having one lot of profit making dams sold (SOE's) and then paying far more each for a loss making dam to take their place. Thanks to the National Govt. "policies".